Global Matters: How to ruin an economy

The global economy has been in slump mode for so long now that it’s hard to imagine there ever was a time when unemployment was low, optimism ran high, mortgages were current and public coffers were full.

Oddly, however, while most every nation continues to struggle, the discussion among the great and powerful seems to consist only of deciding how much public spending to cut.

There’s no doubt, of course, that if you’re on a foundering ship, the first things you do are patch the leaks and bail. But patching and bailing do little to make the ship any less vulnerable to future calamities; at best they preserve – for a time – an unsatisfactory status quo. The inconvenient truth is that current policies presumably aimed at lifting nations out of recession are in fact doing more harm than good.

So why, given the incontrovertible evidence that these efforts continue to fail, the inexplicable adherence to such policies?

Perhaps there is a secret document circulating among the power elite entitled “How to Ruin an Economy.” Perhaps, for reasons yet to be revealed there exists a desire on the part of some to protract the process of recovery and prolong this period of economic malaise.

Where is Oliver Stone when you need him?

Personally, I doubt there is anything resembling a tract on ruining economies to which leaders have subscribed, but if one existed, it would surely contain the following, familiar guidance that got us into this mess and is now ensuring we won’t get out:

Step 1: Place unlimited faith in the unfettered free market. While free markets have led to extraordinary wealth creation and some of the highest standards of living, there’s little doubt that unfettered and unsupervised markets also lead to dangerous social distortions and completely preventable fraud and consequent losses that can bring down entire economies. One sure way to position an economy for future disaster is to assume that markets, and only markets, can police themselves. Thus, to ensure future volatility and create dangerous instability, weaken those irksome regulatory protections that hinder investment and “job creation.”

Step 2: Confuse austerity with prudence. If rational and unbiased reflection confirms that government is spending too much and deriving too little, it’s appropriate to ratchet back. But radical reductions in spending often take so much money out of the economy that growth becomes impossible. What’s more, when spending on infrastructure, for example, is cut, not only is money taken out of the economy, but the value of the infrastructure, i.e., the efficiencies gained by better bridges and roads, is lost. Therefore, to ensure continued economic sluggishness, Cut, cut and cut some more. Surely the private sector will inevitably – and wisely – invest risk capital in public assets if they are truly valuable.

Step 3: Confuse investment with profligacy. In the quest to eliminate waste, budget hawks frequently decry public spending as profligate. But appropriate public spending delivers lasting value and lays the foundation for future economic growth. Public investment built the interstate system, maintains roads and bridges, keeps the streets safe, and funds the research that cures disease and improves lives. Not all public spending is wasteful, but if you’re determined to slow an economy, just assume that it’s all inherently suspect and make “no” your default position: No to teachers, no to energy efficiency, no to basic and applied research. No to growth. That’s the ticket.

Step 4: Protect yourself from unwanted competition. It’s tempting to allow concerns for local business and local employment to drive you towards protectionist policies. Keeping out the competition will ensure that everyone buys local, right? Maybe, but keeping out the competition inevitably results in your businesses being kept out of someone else’s market, and when businesses are denied markets, they are denied growth opportunities. Putting up protectionist walls will help, if at all, for a very short time. The good news, of course, is that you can achieve the goal of stifling growth – and simultaneously enjoy the populist benefit of “protecting” the home market – by imposing tariffs, limiting foreign investment and inculcating an attitude of defeatism.

Step 5: Refuse to compromise, for flexibility is weakness. The global economy is struggling to escape the mire, but already we can see what works and what doesn’t. Strict and ruthless austerity has failed to bring the Irish economy back, and Great Britain’s economy has actually been shrinking. Stimulus measures in the United States and Canada, however, are widely credited with helping these economies avoid Armageddon. No country that has instituted radical austerity has emerged from the crisis; only those countries in which policies have loosened credit and in which spending has stimulated growth have shown signs of life. Thus, in order to preserve the status quo, refuse to pursue growth policies. Dig in your heels. Compromise is failure, and flexibility is weakness. Stay the course.

Time will tell whether continued economic torpor will eventually move leaders to discard the principles contained in this “treatise.” For all of our sakes, however, let’s hope they do so sooner rather than later.

Sidebar Elements

Perry B. Newman is a South Portland resident and president of Atlantica Group, an international business consulting firm based in Portland, with clients in North America, Israel and Europe. He is also chairman of the Maine District Export Council. His website is perrybnewman.com.